Financial Analysis Tools And Techniques
Generally Accepted Accounting Principles (GAAP): These are generally accepted guidelines which are to be followed during the preparation of financial statements. GAAP is technical an accounting term that includes the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. GAAP, usually contains balance sheets as of given dates, income statements for given periods, and cash flow statements for the same periods. A special statement highlighting changes in owners’ equity on the balance sheet is commonly provided as well.
Historical Cost: An accounting principle requiring the recording of transactions and the maintenance of recorded values at the actual level incurred, regardless of any subsequent changes in the value of the assets or liabilities involved.
Accrual Basis vs. Cash Basis Accounting: Recognition of revenues or expenses when earned or incurred, without regard to the actual timing of the cash transactions; used in the accrual method of accounting or we can say in a manner that Method of ACCOUNTING that recognizes REVENUE when earned, rather than when collected. Expenses are recognized when incurred rather than when paid. While on the other hand cash basis accounting is a methodology in which revenues and expenses and all other transactions are recognized when cash changes hands, in contrast to the accrual method of accounting.
Current Assets and Liabilities vs. Non-Current Items: Current assets consist of the value of cash, accounts receivable, marketable securities, inventories and other assets that could be converted to cash in less than 1 year or ASSETS that can be reasonably expected to be converted into cash, or get sold, consumed in operations within a single operating cycle, or within a year incase more than one cycle is completed each year.
Current Liability is an obligation whose LIQUIDATION is expected to require the use of existing resources classified as CURRENT ASSETS, or the creation of other current liabilities or Amount owed for salaries, interest, accounts payable and other debts due within 1 year. Non-Current Items are Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition.
Opinion regarding the usefulness of the Net Income or Cash From Operating Activities:
Both the component net income and cash flow from operating activities has an importance and no one denies the grandness of each. But if we talk about from the organizational point of view (CFO) gives the right choice for opinion because it reflects the daily routine business operation and It gives a fair amount of knowledge about the business running methodology and how the cash mull over with respect to current assets and liabilities of the business.
While on the other hand net income also gives the right idea about the business operation but many contemplation is made with respect to inventory valuation techniques, revenue recognition technique etc.Remember financial cost and the tax factor also reduces the net income in the end of the day dividend is paid to the stockholders and also impression on EPS if the EPS, NI and dividend is high in the current year then the next year hopes of stockholder is high so we can say that net income basically for stock holder or for debtor.
General Motors Corporation
The company suffer Net loss, this would discourage the stock holders who are eagerly looking towards dividend and this factor may lead to decrease in market price per share. Factor of net loss will also send the wrong signal towards the best holder (General Motors, 2006).
Rising in the sales volume this may lead to increase in the total assets.EPS remains constant in the coming years (Home Depot).
Billabong International Limited
Payment of Dividends is high in the near future and this would make an impression that co is working in an efficient manner as per the expectation of the stock holders. Rising in borrowing also causing problems in the shape of financial distress cost (Billabong International Limited).
General Motors Corporation
A charge of $115 million was included in the GMNA results for 2006, related to costs incurred in 2006 under a new salaried severance program, which allows involuntarily terminated employees to receive continued salary and benefits for a period of time after termination. Results for 2005 include charges recognized of $223 million in GMNA and $13 million in Other Operations related to voluntary early retirement and other separation programs with respect to certain salaried employees in the United States. GME results for 2006 include charges for separations and contract cancellations.
Home Depot The Company has a commercial paper program that allows for borrowings up to $2.5 billion. All of the Company’s short-term borrowings in fiscal 2006 and 2005 were made under this commercial paper Program.
Billabong International Limited: Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.
General Motors. (2006). Annual Report.
Home Depot. (2006). Annual Report.
Billabong International Limited. (2006). Annual Report.
Helfert, Erich A. (2001). Financial Analysis Tools And Techniques: A Guide For Managers. McGraw-Hill.